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Curious About The Quality of Chip Eng Seng Corporation Ltd’s Business? Here’s 1 Investing Number To Help

Source: Fool Editorial

Chip Eng Seng Corporation Ltd (SGX: C29) is a company with over 30 years of experience in general construction. It also owns a number of investment properties in Singapore and Australia that produces recurring income.

Chip Eng Seng’s shares are currently trading near a 52-week low, which made me curious about the company. In here, I want to observe its return on invested capital (ROIC).

A brief recap of the ROIC

In a previous article of mine, I had explained how the ROIC can be used to gauge the quality of a business.

The simple idea behind the ROIC is that a business with a higher ROIC requires less capital to generate a profit, and it thus gives investors a higher return per dollar that is invested in the business. High-quality businesses tend to have high ROICs while the reverse is true – a low ROIC is often associated with a low-quality business.

ROIC table

You can see how the math works for the ROIC in the formula above.

Chip Eng Seng’s ROIC

The table below shows how Chip Eng Seng’s ROIC looks like (I had used figures from the company’s last completed financial year):

chip-eng-seng-roic-table
Source: Chip Eng Seng’s earnings release

You can see that the ROIC for Chip Eng Seng is 7.1%. This means that for every dollar of capital invested in the business, the company earns just 7.1 cents in profit. Chip Eng Seng’s ROIC of 7.1% is lower than average, based on the many companies I have studied in the past.

But, as different industries have their own unique capital requirements, it would also be useful to compare Chip Eng Seng’s ROIC to other property and construction companies for further perspective. In this case, the ROIC of Chip Eng Seng is not too far away from that of CapitaLand Limited (SGX: C31), which is 7%. CapitaLand happens to be one of Singapore’s largest real estate developers.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.